It is a basic axiom of microeconomic theory that the ideal market price for a good or service should be set at the market equilibrium point where demand is equal to supply. Unfortunately, just as microeconomic theory is difficult to apply in most real world situations, determining a market price based on market equilibrium point presents a difficult problem.
One example of a difficult case for determining an appropriate market price based on market equilibrium data is the sale of Internet advertising opportunities. Internet search engines, web-based mail, on-line reference sources, television programming guides, and providers of similar services earn revenue by presenting selectable advertisements over networks. The ads may be directed to any persons who might use the service, or the ads may be targeted to those whose on-line activities indicate interest in a particular type of good or service.
For example, FIG. 1 shows a search engine web page 100 that allows a person to perform a web search. To initiate the search, the person enters a search 102, consisting of one or more search terms, in a search field 104. The person then selects or “clicks” on a search button 106 by directing a pointing device (not shown) to position a cursor 108 over the search button 104 and pressing a button on the pointing device. In this example, the user performs a search 102 consisting of the term “Camera.”
As shown in FIG. 2, the search engine returns a results screen 200 listing links 202 to web pages relevant to the search 102. The links 202 are presented and ranked according to their relevance to the search 102. In addition to the links 202, the results screen 200 also includes a number of sponsored links 204-208. The sponsored links 204-208 represent links to sellers or goods of services related to cameras. Unlike the links 202 that are presented because of their particular relevance to the search 102, the sponsored links 204-208 are presented because advertisers paid for the links to be presented. In addition to sponsored links, the provider of the search engine also may present banner ads (not shown) across the search screen 100 (FIG. 1) and the results screen 200, as well as pop-up ads that are presented in separate windows presented over the screens 100 and 200.
If the user wants to learn more about or purchase what is described in one of the sponsored links 204-208, the user positions a cursor 210 over the link and selects it. The likelihood of the user selecting an ad increases if the ad concerns a good or service of interest to the user. Thus, it is not a coincidence that the results screen 200 for the user's search 102 on the term “Camera” presented sponsored links 204-208 representing advertisers who deal in goods or services pertaining to cameras. An advertiser arranges with service providers for its ads to be presented when a user shows an interest in the advertiser's business by, for example, performing a search including one or more search terms relevant to its business. In this case, the sponsored links 204-208 are sold to advertisers who have paid to have their links presented when the word “camera” is used within a search 102. Advertisers agree to pay the search engine provider either each time one of the advertiser's ads either is presented, or each time one of the advertiser's ads is selected or “clicked” by a user.
Typically, the advertising opportunities, such as the sponsored links 204-208, are sold to advertisers by auction. Advertisers submit bids for advertising opportunities that arise, for example, when a user performs a search including one or more terms describing the advertiser's business. The advertisers' bids include a bid price and an auction budget. The bid price specifies a maximum price an advertiser is willing to pay for an advertising opportunity, and the auction budget specifies a total sum of money the advertiser is willing to spend on ads in a particular auction.
In the case of a results page 200 including multiple advertising opportunities in the form of sponsored links 204-208, multiple advertising opportunities are auctioned for each results page. Within the list of sponsored links 204-208, links listed higher in the list are more likely to be selected. Thus, the advertiser offering the highest bidder for the search term “camera” will win the advertising opportunity of sponsored link 204, a next highest bidder will win the advertising opportunity of sponsored link 206, and a third highest bidder will win the advertising opportunity of sponsored link 208. Other lower bidders will not win advertising opportunities.
Auctioning advertising opportunities according to such conventional means may lead to a number of undesirable results for advertisers. First, an advertiser who presents the highest bid may quickly win enough advertising opportunities to deplete its auction budget. However, if the advertiser's budget is completely depleted, the advertiser may be troubled that its offer was too high, particularly if the return on its advertising campaign falls short of its expectations. Second, conversely, an advertiser who presents a relatively low bid but a large budget may not win any advertising opportunities early in the auction period. Once other advertisers' auction budgets are depleted, the advertiser may win all the available advertising opportunities at the end of the auction period. However, the low-bidding advertiser may be very dissatisfied at having failed to win advertising opportunities until the end of the auction period.
In both of these cases, the advertisers may be dissatisfied and, as a result, may change their bidding practices. The high-bidding advertiser may bid lower, hoping to stretch its auction budget and win a larger number of advertisements. However, if the previous high bidder bids too low, it may win few or no advertising opportunities. On the other hand, the low-bidding advertiser may raise its bid, hoping to win advertising opportunities earlier in the auction. However, with the previous high bidder lowering its bid, the previous low bidder may find its auction budget depleted early during the course of the auction and become dissatisfied for the same reasons as the previous high bidder. Both advertisers may expend a great deal of time and money trying to determine how to bid, and still be disappointed with their results.
Understandably, the nature of the auction begets a certain amount of gamesmanship on the part of the advertisers. Because the prices of advertising opportunities sold via auction tend to be highly fluid, bidders may submit bids that are less than they are willing to pay in hopes of getting a bargain or, at least, testing the market to determine the minimum price that they might pay for advertising opportunities. In other words, the advertisers may not submit truthful bids representative of what the advertisers believe the advertising opportunities are worth. Instead, the bidders offer bids that are less than what the bidders believe the value of the advertising opportunities to be. These bids may fall below the market price and/or a reserve price set by the seller. If a bidder submits a bid price that falls below the selling price, the funds the bidder committed to the auction budget will be retained by the bidder.
Strategic bidding makes it a challenge for advertising providers to set market or reserve prices for advertising opportunities. Even if the supply of advertising opportunities is known, the actual demand for the advertising opportunities cannot be ascertained when bidders bid for those opportunities at levels below what those advertising opportunities are worth to them.